Fed keeps $85 billion pace of bond buying, sees risks waning

Fifteen of 19 policy makers said the federal funds rate will be increased in 2015 or later. In March, 14 policy makers predicted an increase in 2015 or later.

St. Louis Fed President James Bullard dissented, saying the committee should “signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings.”

Kansas City Fed President Esther George dissented for the fourth meeting in a row, continuing to cite concern that keeping the benchmark interest rate near zero risks creating “economic and financial imbalances,” including asset price bubbles.

No change in policy was expected at today’s meeting. Fifty- eight of 59 economists in a June 4-5 Bloomberg Survey predicted the central bank would maintain the pace of purchases.

Investors are scrutinizing the Fed’s communications for signs the period of unprecedented stimulus is coming to an end as the economy makes recovers from the longest and deepest recession since the Great Depression.

Consumer Prices

Inflation is providing little impetus for a tapering in bond purchases. A gauge of consumer prices excluding food and energy that is watched by the Fed rose 1.1% in the year through April, matching the smallest gain since records started in 1960.

Speculation that an improving economy will prompt Fed policy makers to reduce bond buying last month triggered the biggest jump in 10-year Treasury yields since December 2010. The yield hit 2.29% on June 11, the highest intraday level since April 2012. The benchmark 10-year yield was little changed yesterday at 2.19%.

About $2 trillion has been erased from the value of global equities since Bernanke told U.S. lawmakers on May 22 that the FOMC “could” consider reducing bond purchases within “the next few meetings” if officials see signs of improvement in the labor market and are convinced the gains can be sustained.

Stocks Declined

The S&P 500 Index tumbled 3.6% between May 21 and June 5, the steepest such decline since November. The benchmark gauge for American equities rose 0.8% yesterday to 1,651.81.

Mortgage rates have soared the most in a decade on speculation the Fed’s purchases may slow. The interest rate on a 30-year fixed home loan climbed to a 14-month high of 3.98% last week, according to data compiled by Freddie Mac.

Investors may be over-reacting to the prospect of a reduction in the pace of bond purchases, said Nathan Sheets, the former head of the Fed’s international finance division.

“Tapering is not a reduction in stimulus,” said Sheets, now the global head of international economics at Citigroup Inc. in New York. “The Fed will still be buying, still removing duration from the market.”

Bernanke is nearing the end of his second four-year term, a period marked by unprecedented measures to battle the deepest recession since the 1930s and then to keep the economy growing at a pace that’s brisk enough to put millions of unemployed Americans back to work.